Many people think personal finance is complicated and stressful, so they put off the same important tasks year after year. The thing is, many of the principal financial decisions you’ll make are actually pretty cut and dry. Not only that, but some of the most impactful financial moves are easy to implement — that is, once you decide with certainty to take the next step.
With all of this in mind, I wanted to share some important financial moves I think everyone should make in the new year. And when I say “everyone,” I mean every single person who cares about their finances enough to invest some time and energy into securing the future they want.
You don’t have to turn your financial life upside down next year to make a huge difference, but here’s what you should do.
Make a plan to pay off high interest debt
Where the average credit card interest rate is currently over 16%, many cards for people with good or excellent credit charge variable interest rates as high as 25%. If you have high interest debt, then this debt is making it harder for you to save for the future, but it’s also costing you a huge amount of money in interest and maybe even fees.
As an example, imagine you have $10,000 in balances on a credit card with an APR of 21%. If you are currently paying $250 per month, it would take you 70 months to pay off your debt, and you would fork over $7,350 in interest in the process. And remember, that’s only if you stopped using credit cards to rack up more debt during that time.
If you want to break the cycle and keep more money for yourself, you should hatch a plan to pay off debt and stop racking up more. You can do this with a strategy like the debt snowball or the debt avalanche, or with the help of a debt consolidation loan or a balance transfer credit card.
Take stock of your insurance coverage
Next, everyone should take stock of the insurance coverage they have. Do your 2020 policies align with your 2021 insurance needs?
Not only does it make sense to shop around for homeowners and auto insurance coverage to see if you could save money with another insurer, but you should make sure you have enough life insurance coverage (at least 10x your income during your working years) and potentially umbrella insurance for more liability coverage.
See if you can (and should) refinance your mortgage
While the Federal Housing Finance Agency announced a new 0.5% fee on mortgage refinances after September 1st, 2021, refinancing now can still be an exceptional idea — especially if you haven’t refinanced in a few years and you plan to stay in your home for the long haul.
How much can you save? That really depends on your current interest rate, the rate you can qualify for, and of course how much you owe on your home.
However, consider this example:
Imagine you just borrowed $300,000 via a 30-year home loan with an APR of 4.5%. In that case, your monthly payment would work out to approximately $1,520 in principal and interest alone, and you would pay $547,220 over the lifetime of the loan.
If you refinanced to a new 30-year home loan with an APR of 3.0%, however, the principal and interest component of your payment would go down to $1,265. Not only that, but the total loan cost would go down to $455,332, which means you would net almost $100,000 in savings.
Plug your numbers into a retirement calculator
A 2019 survey from Bankrate revealed that, out of study respondents who were asked about their savings and investments, 52% percent believed they were behind “where they should be” in terms of their retirement goals. Meanwhile, another 20% didn’t even know if they were on track to retire in any reasonable timeframe.
Both of these statistics are startling but not really that surprising. Unfortunately, you can’t make changes that can help you reach your goals if you’re not sure where you’re at. The only guarantee is this — burying your head in the sand will get you nowhere.
At the very least, you should look for one of the many free retirement calculators online and use it to see where you stand. You’ll need to have a general idea of how much you have saved for retirement right now, as well as how much you invest on a monthly basis and the average return you expect.
If you don’t even know how to get started on this step, then you can also consider reaching out to a fee-only financial advisor who can figure out “where you’re at” and what you can do to build wealth faster.
Keep in mind that fee-only financial advisors are unique because we don’t earn commissions on the financial investments we suggest. Instead, we get paid for assessing your situation and offering unbiased advice.
Look for ways to save and invest more
No matter whether 2020 was good or bad for your finances, it’s smart to start the new year by looking back at where you’ve been. That means breaking out your bank statements and credit card statements to figure out where all your income went for the previous year, as well as whether you have room for improvement. Hint: You definitely do.
When you take this step, you may find that you spent a lot more money than you realized in discretionary categories like dining out, or that you paid a lot more in credit card interest than you realized. Maybe you’ll find you’re paying for a ton of subscription services you barely even use, and that you could instantly save some cash by cutting your subscriptions in half. Either way, you should always strive to spend less on “stuff” you don’t care about so you can save more for things you do.
Here’s my advice: Reduce discretionary spending, eliminate unnecessary expenses like credit card interest and fees, and find ways to put your savings to work. For example, you can take any savings you find and use it to boost the percentage you’re saving for retirement in your workplace account. Conversely, you could use it to invest with a Roth IRA or a Health Savings Account (HSA).
No matter what you do, don’t let another year go by before you create a comprehensive plan to reach your financial goals, whether that means building generational wealth or just being able to retire when you want.